Mary Conway - Investor Relations Ed Terino - Chief Executive Officer Peter Faubert - Chief Financial Officer

Steven Frankel - Dougherty Hamed Khorsand - BWS Financial

Greetings, and welcome to SeaChange Corporation's Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mary Conway, Investor Relations. Please proceed.

Thank you, Devin. Good afternoon, everyone. And thank you for joining us SeaChange released results for the third quarter of fiscal 2019 ended October 31, 2018 today after the market closed. If you would like a copy of the release, you can access it on the Investor Relations section of our Web site at investors.seachange.com. With me on today's call are Ed Terino, Chief Executive Officer and Peter Faubert, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our Web site. Before Ed begins, I would like to remind you that information we are about to discuss today may include forward-looking statements, which are based on current expectations that are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. These risks are outlined in our SEC filings, including our Annual Report on Form 10-K, which was filed on April 16, 2018, and our most recent Form 10-Q, which was filed on September 10, 2018. Any forward-looking statements should be considered in light of these factors. Additionally, this presentation contains certain non-GAAP or adjusted financial measures as defined by the SEC. We have provided a reconciliation of these measures to the most directly comparable GAAP measures in the tables attached to the press release. And with that, I'd like to turn the call over to Ed for opening remarks.

Thank you, Mary, and good afternoon everyone. We are glad you could join our call this afternoon. Let me start by outlining what I will cover in today's call. First, I want to share additional insights on key wins this past quarter and update you on Q2 deals that were delayed. Second, I'll update you on our pipeline for the remainder of fiscal 2019, including the key opportunities that we believe will enable us to achieve sequential bookings growth in Q4 and position us well for revenue growth in fiscal 2020. The good news is that our pipeline remained strong, and we are confident about our opportunities for sequential bookings growth in Q4 2019. Third, I'll update you on recent developments with our product roadmap, which we believe will contribute to near-term bookings opportunities as soon as Q4. Let me start with some highlights from our Q3 results. Top line revenues for the quarter were $18.6 million above the midpoint of our guidance. In the quarter, we recorded approximately $10 million in bookings, nearly double the amount we generated in Q2. I would like to tell you about some of our Q3 '19 customer wins, including some new customers. We won a seven-figure IPTV deal with a new customer, Total Video, based in Russia. Total Video was closely linked with the Russian Cable TV Association or AKTR, and its B2B platform will potentially reach $15 million cable customers. Total Video solution is best suited for Tier 2 and Tier 3 cable operators in Russia and Eastern Europe. In addition to offering cable operators the SeaChange video platform, Total Video will also provide content and set-top boxes to their customers. We won a seven-figure deal with a leading Latin American service provider, seeking to upgrade its video delivery platform. This was one of the deals that we expected to close in Q2, but a short delay resulted in the Q3 closure. We were also successful in closing a seven-figure SeaBridge upgrade with a Tier 1 North American service provider that includes multi-year commitments for support and maintenance. We won a seven-figure IPTV deal with a North American Tier 2 service provider. And we also added two new companies to our long list of cAds customers, one in South America and one in Asia-Pac. Both of these deals were delivered through channel partners that we signed up in the last 12 months. The Asia-Pac deal was another one that was delayed from Q2 and closed early in Q3. We closed several sub-million dollar upgrade deals with existing North American and European customers, some of which were delayed from Q2 and closed in Q3. Several deals that we anticipated to close in Q3, including the seven-figure OTT deal in Latin America and the seven-figure Asia-Pac IPTV deal remained in our pipeline. Now, I would like to discuss our pipeline where we continued to see solid list of opportunities for the remainder of fiscal 2019. As we enter Q4, our pipeline continues to be strong at a slightly higher level than it was at the end of Q2. The pipeline consists mainly of SeaBridge, PanoramiC, cAds and SeaContent opportunities in that order. Most of our opportunities are with service providers. However, we are seeing an increase in our pipeline for PanoramiC opportunities with wireless carriers, content owners and broadcasters. We expect to have a strong bookings quarter in Q4. While our pipeline for Q4 represents close to $30 million in deals, we are forecasting bookings for Q4 in the $20 plus million range. However, a large portion of the Q4 bookings will not be recognized as revenues in Q4, and will instead be in our backlog as we enter fiscal 2020 due to the timing and structure of these deals. Using the midpoint of our Q4 revenue guidance and including bookings that we entered in Q4 in backlog, we estimate that we will need approximately $8 million of additional revenues to be booked and delivered in Q4 of fiscal 2019 in order to achieve our Q4 revenue target of $16 million to $20 million. Once again, included in the near-term pipeline are several seven-figure transactions with both new and existing customers. One of the critical transactions in Q4 is a license purchase from Liberty Global. While we are still in discussions with Liberty at this time, we expect the seven-figure purchase of licenses by Liberty in Q4. Some of our other pipeline opportunities are through partners for new customers, especially in geographies like Asia-Pac and South America where we’ve been having more success lately. But the majority of our deals in the near-term pipeline on a dollar basis are direct sales opportunities with existing customers for upgrade and expansion of video platforms. We are dedicating added effort towards closing several SeaBridge and SeaContent upgrades, as well as several cAds upgrades, continue our success with these product solutions. We also have several PanoramiC opportunities in the pipeline for Q4 of fiscal 2019, and we hope to close at least one of these. I will repeat that the overall pipeline still includes deals that have slipped from prior quarters, but we have not lost these deals. Now, let me update you on our innovation and product roadmap. There are several trends that are driving video solution providers like SeaChange to innovate and improve their video solutions. First, changes in viewing habits continue to accelerate such as pull versus push, anytime, anywhere, anyplace on any device for video. Second, new business models are in flux, driving the need for new delivery and management solutions as well as platforms. Third, video platforms are moving in many cases, have already moved to the cloud, both private and public to take advantage of the cloud’s flexibility and scalability. Video solution providers must reinvent their video solutions to be cloud native. And last, network usage is transforming video platforms from com to IP to 5G networks, require video solution providers to reinvent their platforms to support current networks yet enable migration to IP and 5G-based networks. As we enter fiscal 2020, we have four areas of focus in our product roadmap. First, enhancing our SeaBridge back office solution to offer the cloud’s benefits while continuing to leverage our customers’ investments in their video platform and set-top boxes. By the middle of next year, SeaChange plans to deploy a cloud data back office built on a micro-services architecture, which supports multi-tenancy and automated deployment. We believe that we will have one of the industry's only video platforms to offer these features; continuing to improve and expand our online video platform for OTT opportunities by offering a full managed service video platform that operates in a public or hybrid cloud, and that includes all configuration management 24x7 day monitoring and operator independent viewer interface customization; enhancing and evolving our content management solution, SeaContent into a fully cloud deployed media asset management solution; SeaContent will not only continue to provide automated content workflow management, but also leverage industry standards and third-party AI based dynamic content processing services to enhance capabilities and mata data enrichment and augmentation; expanding our CAAS Platform to be a fully virtualized solution that provides spot advertising for OTT video delivery platforms. Before I turn the call over to Peter, I want to underscore our focus on regaining operating profitability in the first quarter of fiscal 2020. While the transition to our new product portfolio and accelerated growth with new customers is taking longer than we would like, we remain confident in our strategy to drive long-term growth for the benefits of all of our shareholders, customers and employees. With that, I’ll hand the call over to Peter.

Thank you, Ed. Good afternoon everyone. I'll start by reviewing our third quarter results before providing you with an outlook for the fourth quarter and updating our guidance for fiscal year 2019. We entered the third quarter of fiscal 2019 with $7.7 million in total backlog, excluding maintenance and support. We book new business of $10 million during the third quarter and ended the quarter with a backlog of $6.5 million. As Ed stated, we continue to have strong pipeline with significant opportunities that we can close in the fourth quarter of this fiscal year, even if we cannot recognize all of them in Q4 -- recognize revenue on all of them in Q4 due to the timing and nature of those deals. That provides us with confidence that we will achieve our updated revenue targets for fiscal year 2019 and more importantly, positions us better for growth in fiscal 2020. Total revenue in the third quarter was $18.6 million above the midpoint of our revenue guidance compared to the $23.4 million in the third quarter of the prior fiscal year. Our product revenue was lower compared to last year, primarily due to less product sales to our largest customer compared to the prior year. We continue to see subscription deals rather than term licenses in our pipeline of opportunities that should close before the end of this fiscal year. As a reminder, these deals will not contribute much to the top line for this fiscal year, but will increase our backlog as we exit this year and will result in more predictable recurring revenue stream in fiscal 2020 and going forward. Total product revenue was $8.3 million in the third quarter or 44% of total revenue compared to $11.1 million in the year ago quarter or 47% of total revenue. Video platform software revenue was $5.3 million and accounted for 64% of the total product revenue compared to $10.4 million or 93% of the total product revenue in the third quarter of last fiscal year. I'll note that advertizing product revenues were substantially higher at $1.8 million in this year's third quarter compared to a negligible amount in last year's third quarter. Total services revenue in the third quarter was $10.3 million or 56% of total revenue compared to $12.3 million or 53% of total revenue in the third quarter of last fiscal year. As expected, maintenance revenue continued to decline in the third quarter, driven by further decommissioning of legacy hardware, as well as the migration of subscribers off of our legacy axiom video platforms. At the same time, we do continue to see the benefit from more opportunities to upgrade our advertising customers from legacy hardware based advertising platforms to our next-generation virtualized advertising software as more of these types of transactions closed in the most recent quarter. Video platform professional service revenue was $2.6 million compared to $3.4 million in the same quarter of last fiscal year. Maintenance revenue totaled $7.5 million or 40% of total revenue and 73% of total service revenue compared to $8.1 million or 35% of total revenue and 66% of total service revenue in the third quarter of last fiscal year. Revenue from international customers of $10.5 million in the third quarter of this year represented 56% of total revenue compared to $17.3 million or 74% of total revenue in the prior year quarter. Four customers each comprised of more than 10% of our total revenue in the third quarter of this fiscal year compared to the third quarter of last year when one customer comprised of more than 10%. Excluding our non-GAAP charges in the third quarter of fiscal 2019, non-GAAP gross profit margin was 62% in this year's third quarter compared to 71% in the prior year quarter. The lower gross margins in Q3 of fiscal 2019 was a result of more lower margin hardware product sales compared to prior year's period. Our non-GAAP product gross margin in the third quarter of this year was 79% compared to 89% in the prior year quarter. The decline was driven by product mix, as in the prior year we sold higher margin software licenses to our largest customer. Non-GAAP service gross margin in the third quarter was 48% compared to 54% in the prior year quarter. Non-GAAP operating expenses in the third quarter of fiscal 2019 were $11.8 million, down from $13.4 million in the same quarter of the prior year and lower than the targeted $12 million to which we were managing. Contributing to the lower operating expenses were the cost reduction initiatives that we announced in September, offset by ongoing consulting costs for the adoption of new revenue recognition guidance. In addition, we continued to invest in marketing initiatives and overall sales and marketing resources over the same quarter compared to the same quarter of last fiscal year. The additional cost savings initiatives that we implemented in the third quarter of this year were designed to decrease our quarterly non-GAAP operating expenses to below $12 million per quarter on a normal run rate basis. The combination of these cost savings initiatives and our expected revenues for the remainder of this fiscal year and into fiscal 2020 should position us to return to operating profitability and positive cash flow in the first quarter of next fiscal year. Our non-GAAP operating loss of $0.01 per basic share, which was in the midpoint of our EPS guidance compares to a non-GAAP operating income of $0.09 per fully diluted share in the third quarter of last fiscal year. Turning to our balance sheet. We ended the third quarter with cash and cash equivalents of approximately $32.4 million and no debt, compared to approximately $35 million at the end of the second quarter of this fiscal year. The cash decrease in the third quarter was driven by funds used for operations during the quarter and cash payments related to our cost savings initiatives, as well as working capital fluctuations during the quarter. Deferred revenue of $7.1 million fell from the $8.5 million as of July 31, 2018 and $15.6 million in the last year's third quarter, driven primarily by timing of revenue recognized and renewal of post warranty maintenance and support agreements during the quarter. Day sales outstanding excluding unbilled receivables was 71 days at the end of the third quarter of this fiscal year compared to 111 days in the third quarter of last fiscal year. Including unbilled receivables, days sales outstanding totaled 95 days in the third quarter of this year compared to 125 days in the third quarter of last fiscal year. This shows our continued success in improving collections as we discussed last quarter. Our unbilled receivables were $7.9 million in the third quarter of this fiscal year compared to $3.6 million in the third quarter of last fiscal year. The increase is a result of product shipments to three customers at the end of this quarter that were not yet invoiced as of October 31, 2018. In addition, the change reflects timing and professional service work delivered during the quarter for which the customers were not yet billed. Overall in fiscal 2019, we continue to expect the product revenues including SaaS revenue will contribute approximately 30% of total revenues for the year. We also expect maintenance revenues to be approximately 40% of total revenues in fiscal 2019. Lastly, we continue to expect professional services revenue to contribute approximately 30% of total revenues in fiscal 2019. In fiscal 2019 and more significantly in fiscal 2020, we expect that a growing portion of our products and services bookings from the pipeline will be on a subscription based business models. These opportunities represent large multi-year revenue opportunities as Ed described. They reflect the combination of direct deals as well as those driven by SeaChange channel partners. By winning these opportunities, we will increase our backlog in recurring revenue going forward. At the same time, the mix of transactions between subscription and perpetual licenses could impact the timing of revenue recognition for products and services in the short-term. Before I discuss guidance, I wanted to provide an update on the cost savings initiatives that we implemented in the third quarter of fiscal 2019. As noted, we anticipate that this program will produce annualized cost savings of approximately $6 million when completed this year. The primary elements of the program were staff reductions across all of our functions and geographic areas. At the end of the third quarter, it was largely complete and we expect the remaining actions will be completed before the end of this fiscal year. Moving to our outlook. We anticipate that revenues for the fourth quarter of fiscal 2019 will be in the range of $16 million to $20 million and that non-GAAP operating results will be in the range of a loss of $0.05 per basic share to income of $0.02 per fully diluted share. For the full year based upon the timing of closing and business model related to a number of major potential business opportunities in the pipeline, we now anticipate that revenues will be in the range of $61 million to $65 million. As Ed stated, we have multiple large license revenue opportunities in our pipeline today, some of them SaaS or platform-as-a-service, which will contribute significantly to bookings once closed, but will not contribute material revenues to this fiscal year. I'll remind you that achieving our updated full year revenue expectations requires closing only a portion of the total opportunities available to us. We now anticipate non-GAAP operating loss in the range of a loss of $0.34 to $0.27 per basic share for the full year of fiscal 2019. We expect to attain operating profitability in Q1 of fiscal 2020. With that, I will hand the call back to Mary. Thank you very much.

Thank you, Peter. Operator, can you please provide instructions for the Q&A session?

At this time, we will be conducting a question-and-answer session [Operator Instructions]. Our first question comes from the line of Steven Frankel with Dougherty. Please proceed with your question.

I would like to start with the significant change in the outlook for the full year. Last quarter despite the Q2 miss, you had a fairly optimistic outlook for something like $30 million to $40 million worth of business that you thought you could close out of your pipeline in the back half. Have you gotten more conservative or is this the fact that a lot of that business is now going to be SaaS, so it’s not coming to revenue. What's the change between that optimism and the much lower Q4 guide?

Yes, I would say it's a combination of things, Steve. So, we had expected that there would be two to three fairly sizable license deals that we would see in either Q3 and/or Q4. And while we still have an expectation that we will see them, we know that at least one which was a fairly large seven figure deal that will slip out to next year. And then the other one, while there is still possibility obviously with one of our larger customers, we think it’s going to be less than what we had anticipated earlier. In addition, we do have fairly sizable -- several fairly sizable deals in the Q4 pipeline. One of them is a SaaS deal and one of them is the deal that we expect to close in the late December, January timeframe for which we won't be able to take any revenues in Q4. So when you look at the bookings numbers that we expect, it's much larger than what it was in Q3, but we won’t be able to recognize a lot of the revenue that we'll book in Q4.

Maybe go out at this way? So you had talked about $30 million to $40 million in the back half in bookings. What do you think your back half bookings are likely to look like now?

So Steve, with 10 million in bookings in Q3 and Ed stating that we expect $20 million bookings range in Q4, that puts us at the low end of that $30 million to $40 million in bookings that we expected last quarter. So I think we're still on track to do that. And I think the bigger difference is lower license sales to one of our larger customers in Q4 than we originally expected.

And what you think had led that customer to come back for a smaller round of license at this time? Is that a change in their overall demand? Is it timing? Is it a change in how they are viewing your products?

It's certainly not a change how they're viewing the product. We’re still in discussions, so I don't want to really comment on it any further. But it isn’t related at all to our engaging with them or the use of technology at all.

And what caused the pressure on services margin? Is that just less maintenance, which is the highest piece of the services pie?

No, it's more on the professional service side, Steve. We have talked about the fact that we still have a fairly high fixed cost base in our professional services organization, and we are trying to migrate that to external third party resources. But with the lower professional service revenue this quarter and the higher fixed cost base, it certainly put a lot of pressure on the PS margins for this quarter. We have seen that the maintenance and support margins have been fairly consistent. So it's all on the PS side.

And what was Liberty as a percentage of revenue this quarter?

10%.

Just to compare that last year in the quarter it was 53% a year ago.

And do you believe that your opportunity with them after this next quarter continues to extend into fiscal '20 and beyond? Or does the success the Company really shifts now to driving these new products into new customers?

It's both, but we do expect to continue to sell licenses into Liberty Global. So, they have been growing their subscriber base by about 10% a year, and with roughly $14 million enhanced subscribers that would represent about $1.5 million additional subscribers a year. Now, there are some divestitures they are taking that may put a dent in those numbers, but it's a combination of both. We obviously have new products and we are going after new markets and we have those types of opportunities, but we also expect Liberty to continue to contribute a sizable portion of our annual revenues.

And in terms of the product shipment that didn't get invoice in the quarter. Does that have anything to do with something on your side of the ledger where you didn’t totally deliver to stack or what impacts that tie?

So, a lot of it was timing of closing the deals and then obviously shipping the product towards the end of the quarter. Some of these deals were in Central America and there is a -- I would say, a much more arduous process around getting purchase order issued from some of these customers. So, it's really more of paper work on the customer side that prevented us from invoicing right away than our delivery or our product…

Our execution…

Acceptance, right…

And the other one was a seven-figure deal that literally closed on the last day of the quarter and we weren’t able to ship it…

But we shipped those software licenses…

And these Central American deals that you closed in any of those [audio gap] so far in this quarter?

Yes, so, we have -- it’s a three-part PO process with them and we have received the first of the three POs. So, we will be able to invoice a portion of that here coming up shortly and we expect the other two purchase orders to be issued in the next couple of weeks.

Our next question comes from the line of Hamed Khorsand with BWS Financial. Please proceed with your question.

So first off, how much of the Q3 revenue was subscription driven?

Really a negligible amount in the third quarter.

What are you expecting that to be in Q4?

Again, any SaaS or subscription deal that we are expecting to book in Q4, we don't expect top line contribution from those deals for this fiscal year. So, again negligible amount this year.

So, what I'm trying to understand is I mean you’re talking more and more about subscription revenue coming through instead of licensing, but yet you don't know the impact of what revenue looks like for next year. I mean, is it going to be impactful as we go into next year? Or is it just going to be negligible?

So, I think that it's going to be impactful but certainly, you have to get platform operational. So if we were to get a subscription deal, let's say in Q4 which we expect, then it would take us somewhere between three and six months to get that platform up and running and delivering -- having subscribers subscribe to it, and then the revenues would start materializing. We did a deal similar to this with Partner Communications in Israel couple of years ago and they built a subscriber count from zero to roughly about 300,000. But it's taken them -- the platform was up and running in less than six months. But it's taken them a year-and-a-half to build the subscriber count up to 300,000. So, the revenues do come at a slower pace with SaaS deals than they do with license -- perpetual license deals.

But that impact, how much of the mix are we talking about -- are you -- that you think that’s going to be down so much?

We haven't really dug into the actual make up of our fiscal 2020 revenues. I mean, obviously, we’re going to be expecting to grow revenues. We still think a significant portion of our revenues will be perpetual revenues next year. We don't think that SaaS revenues will be that big of a percentage, I would say it’ll be certainly less than 25% and maybe even less than 10%.

And then given the cash requirement for this restructuring that you just went through, are you able to be cash flow positive? Or let me phrase that -- free cash flow positive for Q4 and into next fiscal year?

So we’re managing Q4 to be cash flow breakeven to cash flow positive, but that obviously depends on changes in working capital and other factors, but we are tracking it regularly. And we do expect to turn -- return to profitability and positive cash flow in Q1 of fiscal 2020.

Could you just clarify if it’s free cash or just cash flow?

It's free cash flow.

Our next question comes from the line of Steven Frankel with Dougherty. Please proceed with your question.

Just a follow-up on the Russian deal that you talked about. Is that entity that you named, is that the ultimate customer offer you to see material revenue, they have to go out strike deals with customers to generate revenue for you?

So, it's both. So, we do have a deal where they pay us a certain amount of money to build out the platform and deliver the platform. It's a seven-figure amount of money but it's really -- it's a very small seven figures. But then beyond that, they then have to go out and list all of the different operators, the 15 million or so subscribers and the various cable operators. And then there will be an additional revenue generation from that.

Since there are no further questions left in the queue, I would like to turn the call back over to Mr. Ed Terino, CEO, for closing remarks.

Okay. Well, thanks again for joining us this evening. As I hope you've heard, we are working pretty diligently to achieve our revised revenue and operating profitability targets for this year. And we're encouraged with the response to our new products and solutions from the market. We've made significant progress in launching an exciting and truly innovative solutions portfolio with a new brand identity and growing pipeline. And I am grateful to our team members who have contributed so much to these accomplishments. We have adapted our sales and marketing approach to benefit our new products in markets and we're creating mutually productive relationships with partners in important geographies around the world, partner relationships that are now generating revenues for us. With all these elements in place, we're confident that we can achieve improved top line and bottom line financial performance as we go into fiscal 2020. Thanks to everyone for joining us today and for your continued support and interest in SeaChange. Have a great evening. Good night.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.